Inflation expectations are currently trending north, driven by the unraveling oil price shock, with a roughly 70% surge in crude oil prices this year driven by the Middle East war, intensifying fears of a renewed inflation spurt. The U.S. one-year inflation swap rate has recently surged above 3%, marking its highest level since late 2025. A recent Bank of America survey found that 45% of fund managers now expect higher global inflation over the next year, a sharp rise from just 9% a month ago.
The survey indicates that market participants expect consumer price inflation to remain elevated, driven by rising energy costs and inflationary pressures.
Actual inflation numbers suggest that consumer prices are trending in the wrong direction. U.S. wholesale inflation rose to an annual rate of 3.4% in February, up from 2.9% in January, driven significantly by a persistent surge in the cost of services. The increase marked the largest 12-month advance since February 2025. February inflation increased 0.7% month-on-month, representing the sharpest monthly jump in seven months. More than half of the monthly increase was attributed to a 0.5% rise in services, with traveler accommodation prices spiking 5.7%. Prices for goods jumped 1.1%, the largest gain in two and half years, fueled by a 2.4% surge in food costs.
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The latest Producer Price Index (PPI) report complicates the path toward interest rate cuts, with inflation remaining well above the Fed’s 2% target. Markets have rapidly priced out previous expectations for multiple rate cuts in 2026, with current forecasts suggesting the Fed may hold rates in the 3.50-3.75% range and potentially project only one cut–or potentially none–for the remainder of the year. However, long-term indicators suggest that inflation might not be persistent.
To wit, the five-year forward inflation swap (a measure of 10-year expectations) actually declined to 2.35%, its lowest in nearly a year. Higher energy costs act as a tax on consumers, which may eventually dampen overall demand and cool long-term inflationary pressures.
The conflict is now extending further into core energy infrastructure. Strikes on Iran’s South Pars gas field–the world’s largest–have already forced partial shutdowns of key phases and associated facilities, with fires reported at gas and petrochemical sites. Iranian officials have issued explicit warnings that oil and gas infrastructure across Saudi Arabia, the UAE, and Qatar could be targeted in the coming hours.
